How long applies a trend? Until, it is broken. This rather lapidary statement brings some beginners in trading almost to despair. Because sooner or later Trends will finish and one can profit from them. In this article you will learn how to use a trend reversal for your trading approach.
We will deal in this article with when a trend is broken and how from this situation a profitable and low-risk trade idea can be developed (processed) – the so-called “Surprising Movement”. Suppose that a trend exist already for a long time and the various market participants see the Trend very clearly like on the chart (blue line). It must therefore be assumed that the longer and more obvious the trend, the more market participants will jump on and try to trade in this way. It is irrelevant whether these market participants open a trade at each high point of the trends and expend their positions or pursue an entirely different trading approach. In the example we see now that the market – here the DAX future – does not form more new highs. The market ran since October 2014 almost like a picture book of a trend towards new highs. Each market participant knew only one direction: upwards. First, the magic mark of 10,000 points was overcome, and then formed a small price pullback and thus formed in February 2015 trend-conforming new high points. Since that time, an established trend was in existence. This means that the majority of market participants looked mentally in a long upward movement. Now we come to the surprising movement. If it can be assumed that many market players think and act in the same direction, then it will surprise as many traders, if the trend ends. Let us put ourselves in the position: Some traders have now to close positions that were painstakingly built or even turn their positions. Other traders however have jumped in our example so late on the trend that they have no other choice than to close their position with a loss in order to prevent greater damage. This sounds like a situation in which many market players are forced to act – in order to secure profits and/or to minimize losses. Exactly this situation is called “Surprising Movement”. Figure 1 illustrates the situation. The red section shows the Surprising Movement in its formation and the resulting new downtrend. We see a long-running and continuing trend, which is nearing its end. As a reminder, the trend definition: A trend consists of rising high points and rising low points. A downward trend results from falling low points and falling high points.
This is precisely the point, where all market participants meet each other for the first time. These are now being forced to face up to market realities and to tread new paths. Thus, the situation will most likely be accompanied by a disproportionately high trading-volume. This is precisely where the strategy Surprising Movement comes into play. With the knowledge that there is an increased interest in the market in this position, a trading idea based on falling prices is worked out. Through the emerging momentum in the market and the end of the trend and the emergence of a new trend, a situation is created that can bring the trade-idea within a very short time in the profit-zone.
The idea in detail:
- The current trend has to be very obvious and thus seen chronologically to exist for a long period.
- The trend must be on the verge of no longer satisfying its trend definitions.
- The market forms a first counter-trend to the previous trading history.
- The emerging trade-volume would force many traders exactly at this point to become active in the market.
Figure 2 shows the situation. The market does not form more new high-points. On 13, 14 and 15 April 2015 the end of the long upward movement is achieved. The market falls first few days, so that market participants might think that this is just a correction in an established uptrend-move. The brief consolidation between the price range 11600 and 12000 between 17 and 28 April 2015 (yellow rectangle) can germinate again the hope that the market will continue upwards after the consolidation. By falling below the price of 11600 the hope of market participants is permanently destroyed. What we here see is the emergence of a downward counter-trend. This becomes apparent as the downward trend is clearly defined by falling low points and falling high points. It is therefore necessary to anticipate this definition in the context of market behavior – in a certain way to think forward. The trade idea is activated by the falling under the course mark of 11 600 (and thus the confirmation of a downtrend). The loss limit stop is placed on the previous, recent high point – in this case, at 12100 points. It makes sense to place the stop at the moderate distance of 20 to 30 points on a daily basis over the last high point. We see that when breaking the course mark a high volume in the market is formed. This is the momentum. Traders are forced at this point to react to the now falling market. The long upward movement is over.
The key to the Surprising Movement is that the name explains exactly what the idea includes: A surprise that the long existing trend is over and a turning at high trading volume takes place. This type of trading situation is not immediately apparent on the chart and therefore results only by anticipation, i.e. the conceptual (mental, intellectual) continuation of the courses. If the trend is early detected by the dealer, this can be a very profitable trade. It should further be noted that this method can be applied at all trend-figures (trend variables). However, the surprising movement increases, the greater the trend and the number of market participants are involved. It is thus assumed that the movement of the first counter-trend is more significant on a daily chart as opposed to a smaller movement of the counter-trend in a 1-hour chart.
High volume in the market
A first countertrend is seen as by increasing volume falling lows and falling highs start to form. The brief consolidation between the price range 11600 and 12000 between 17 and 28 April 2015 (yellow rectangle) can germinate again the hope that the market will continue upwards after the consolidation. By falling below the price of 11600 the hope of market participants is permanently destroyed. The Entry takes here place and the loss limit stop is placed on the previous, recent high point. It makes sense to place the stop at the moderate distance of 20 to 30 points on a daily basis over the last high point. Source: AgenaTrader